The Pecora Committee in Context: Mythbusting

Glenn Greenwald got it right this week when he zeroed in on the Banking Culture’s hold on Congress. Tellingly, he quoted Dick Durbin of Illinois, the number two Democrat in the Senate, who on a radio talk show, “blurted out an obvious truth about Congress that, despite being blindingly obvious, is rarely spoken.”

And what was that obvious truth? Quoting Durbin: “And the banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.”

The banks didn’t always own the place, though for much of our history they have. As Robert Caro points out in Master of the Senate, the third volume of his magisterial biography of Lyndon Johnson, during the Gilded Age, the Senate became virtually a clubhouse for Republican millionaire-bankers.

The one time the bankers emphatically didn’t own the place came some fifty years later when the Senate Banking Committee began its explorations into the whys and wherefores of the Crash of 1929. Even then, the bankers came very close to making the lights go out and the cameras all just go away.

The reason they didn’t succeed: A fifty-three-year-old, cigar-chewing former Manhattan assistant D.A. named Ferdinand Pecora, who in January 1933 became counsel to the committee.

Ron Chernow has told this story well and in some detail in his excellent study of The House of Morgan. One of Chernow’s most telling points—and one we should ponder carefully—is that, “For six months, the hearings had been stalled. Republicans and Democrats, with fine impartiality, had feared fat cats of both parties might be named and united in a conspiracy of silence.”

Chernow could just as easily have been writing about today, about how House and Senate and now White House alike have dithered over investigations not only into the financial scandals but also into wireless wiretapping and torture. It’s all much of a much.

To an extraordinary degree, in the halls of Congress, the conspiracy of silence continues to protect sinners on both sides of the aisle. That it is patently obvious that there are more sinners on one side of the aisle than the other doesn’t seem somehow important enough to alter the equation.

And so, as it was not quite 80 years ago, and as it was again in 1973, someone—some one man, some one woman—must break the logjam if ever we are to get at the truth.

Richard Reeves tells us in his fine book, President Nixon: Alone in the White House, that Nixon’s first reaction on hearing that the 76-year-old North Carolina Democrat Sam Ervin had been named to lead the Senate’s select committee to investigate the Watergate break-ins was one of relief: “Thank God it’s Ervin.” Nixon thought Ervin old and unsteady, a drunk—“The great constitutionalist,” Nixon called him. He meant it as a sneer.

But Ervin was also cagy and eloquent—“English is my native language”—and a person of great rectitude. His homespun wit became him, but he also exuded gravitas. He was no fool.

Pecora was a cat of an entirely different stripe. He was hard-bitten and tough-minded. He looked tough, and he was tough. But, like Ervin, he was smart—and he was honest. This son of Italy backed down for no man—not even the feared Morgans’ men. Nor even Morgan himself.

Most of all, Pecora brought focus to the hearings: “Something curious now happened: as the hearings shifted form present to past, memories of the crash grew in the public mind. At first, Main Street smirked at the crash as a Calvinist thunderbolt hurled at big-city sinners. Only now, when the crash was seen as a forerunner of depression, did public rage against the bankers crystallize.”

With Pecora as counsel, “the hearings acquired a new, irresistible momentum. They would afford a secret history of the crash, a sobering postmortem of the twenties that would blacken the name of bankers for a generation. From now on, they would be called banksters.”

How did Pecora do this?

With his relentless investigation of the books on Wall Street and his even more relentless examination of the witnesses called before the committee, Pecora presented a portrait of financial corruption that was, even now, mind-boggling.

Yes, there were sinners. The head of the New York Stock Exchange—the brother of a Morgan partner—was one. He wound-up in prison. Of the others, perhaps the best known were the CEOs of what are today . . . Citibank and Chase.

At National City Bank, a hundred top officers had borrowed $2.4 million, interest free, from what president Charles E. Mitchell deemed the “special morale fund,” to buffer their crash losses. A morale booster indeed since none of the loans were ever repaid.

At Chase, president Albert H. Wiggin, the poker-playing clergyman’s son who sat on some 59 corporate boards, was “exposed as being up to his ears in mischief. For six weeks in 1929, he had shorted shares of Chase stock and earned several million dollars; the speculation was backed by an $8-million loan from Chase itself. For good measure, Wiggin had set up a Canadian securities company to avoid federal taxes.”

City’s Mitchell—“the ideal modern bank executive,” the financial editor of the New York Sun had called him in May 1929—was just as bad. In the lead-up to the Crash, Mitchell had led what Time magazine was to describe as “the most flamboyant high-pressure bank stock selling campaign in history.” In that one year (1929) alone, the National City salesmen had sold 1,900,000 shares of National City to the public for some $650,000,000—more than $7 billion in today’s money.

Like Wiggin, Mitchell, who earned more than $3.5 million in the years 1927-29, wasn’t keen on paying income tax. Instead, he sold 18,000 shares of National City to a member of his own family and took a $2.8 million loss.

Throughout the Twenties, Mitchell had had the nearly two thousand salesmen of the National City Company sell millions of dollars in risky Latin American bonds to a gullible public. Later, as Chernow says, “It emerged that in touting bonds from Brazil, Peru, Chile, and Cuba to investors, the bank had hushed up internal reports on problems in those countries.” Most infamously, as Pecora discovered and Time magazine reported, “Through an issue of its own stock in 1927 National City Co. bought $25,000,000 of stock in General Sugar Corp., boneyard of National City’s Cuban sugar properties. With this cash General Sugar ‘bailed out’ National City Bank’s bad sugar loans. The Company has since written this investment down to $1.”

Hauled before the Pecora committee, Mitchell was asked by Senator Couzens of Michigan about the bonuses City paid to its salespeople: “Doesn’t it inspire a lack of care in the sale of securities to the public?” To which Mitchell replied, “I can readily see . . . that it would seem so . . . At the same time I don’t recall seeing it operate that way.” Said Senator Couzzens: “You wouldn’t.”

By the time the hearings finally ended in 1934, the public was more than just aroused. As Chernow says, “The Pecora findings created a tidal wave of anger against Wall Street.”

And, in the process, Pecora had effectively ended Morgans’ attempt to put one of their own, partner Russell Leffingwell, into the highest reaches of the Roosevelt administration. For what Morgans had hoped was that the handsome Leffingwell would be the power within the Treasury, the strong #2 to a weak, ailing Treasury Secretary Woodin.

Not only was Leffingwell not nominated, but when partner Thomas Lamont—Morgans’ urbane leader—called on President Roosevelt urging him to avoid drastic measures to reform the banking industry, Roosevelt brushed him—and Morgans—aside. Roosevelt and the New Deal plowed forcefully ahead. Thus the week-long bank holiday. Thus the closure of some 500 banks nation-wide. Drastic measures indeed. But they worked.

And, as Chernow says, “This tough action restored public confidence.” The banks, meanwhile, like banks (and bankers) today, had “settled for scare tactics.” And had lost.